The Green Sheet Online Edition

April 14, 2008 • Issue 08:04:01

Payments technology twists, turns, surprises

It is said that the public sees a need, and some geeky genius develops the technology to fill it. But, it is more common in the payments industry for innovations in technology to spawn new products, and developers hope their new gadgets will capture the public's fancy.

This is probably not such a bad thing. Merchants, in general, resist new technologies, particularly those affecting their money. If an innovation also requires a substantial financial and training commitment, they're even more reluctant to try it.

And consumers may love their iPods, but they are more apprehensive than merchants about new technologies that can touch their bank accounts. They will trust their music to a machine, but they are slow to trust their money to one.

For example, the first automatic cash dispenser (designed by Luther George Simjian) was installed in 1939 at City Bank of New York. Six months later, the bank removed it due to lack of customer acceptance. It was nearly 30 more years before the modern automated teller machine (ATM) was developed - and even longer before customers embraced it.

Here today, morphed tomorrow

Then there are the technologies that faded away, despite an initial buzz. The latest victim in that line appears to be biometrics.

Biometrics identification is coupled with cell phone payment for millions of Japanese consumers, and it's gotten considerable press. But it hasn't gained widespread adoption in the United States.

Recently, Solidus Networks Inc. filed for bankruptcy protection and closed its biometrics unit. In the wake of this filing, some financial analysts questioned whether consumers are ready to accept technology that relies on biological information to identify them.

And yet, technology continues to change the way we live at an increasingly rapid clip.

Many of us can remember life before e-mail, cell phones and global positioning systems for automobiles. But now the paper map is going the way of the Dodo; the post office is reduced to delivering advertising flyers or packages; and public phone booths are no longer ubiquitous.

Likewise, some of us remember when merchants used "knuckle busters" to record transactions: It was all done on paper with carbon copies that were mailed in for processing. Today, many retail employees wouldn't even recognize a carbon copy charge slip.

Throughout history, uses found for technological breakthroughs have often surprised their creators: Text messaging was devised to help developers test cellular phone lines behind the scenes.

The record player was originally intended for dictation, and the Internet was designed to transfer files between academics at distant universities.

The microwave oven (originally called a radar range) was developed after a radar system technician discovered that a candy bar in his pocket melted when he stood close to a magnetron.

Even the credit card was something of an afterthought. Although some fuel merchants as early as the 1920s had cards for their own customers, it took a lost wallet to launch a card that was good at multiple merchants.

In 1949, businessman Frank McNamara discovered, when presented with a restaurant bill, that he had left his cash in his other suit. His wife paid the bill, but the embarrassment led him to create the Diner's Club Card. Initially, a whopping 14 restaurants accepted it.

From a simple need to be able to charge a dinner, we ended up with the worldwide, real-time transaction processing network that is at the heart of e-commerce. McNamara never expected to displace cash, but credit and debit cards are on the verge of doing just that.

Back office check conversion, contactless payments, cell phone technology, Internet commerce, pay-at-the-table technologies - many of these evolved from technological developments initially designed for something else. And the pace of new development is accelerating.

Here's a look at some technologies that have shaped our industry and will continue to do so.

The magnetic stripe

A pothole along the tech superhighway

New back-office conversion (BOC) standards were rolled out in March 2007. BOC starts at the POS, where a consumer writes a check to make a purchase. The cashier runs the check through a magnetic ink character recognition reader, which converts it to an electronic payment via the automated clearing house (ACH) system for real-time payment authorization.

At the end of the business day, paper checks are scanned on a high-speed, desktop imager, and images are whisked electronically to a processor's data center. There, checks are cleared by a number of methods, such as directly debiting customer checking accounts or running checks through the ACH again as electronic funds transfer transactions.

BOC can save merchants time typically spent preparing checks for deposit and carting them to a bank. But according to Rod Springhetti, Director of Payments Solutions at electronic billing and payment solutions provider CheckFree, "The rollout of [BOC] has been slower than anyone expected."

The capability of converting paper checks to ACH transactions has existed for years. Springhetti pointed to the aggressive rollout of ACH check conversion at the POS by Wal-Mart Stores Inc., a program reportedly begun in 2000.

Springhetti said Wal-Mart's program likely labored under old point of purchase rules, which required cashiers to get signed BOC authorizations from customers on check purchases and to return paper checks to customers after they had been run through the POS reader.

"In that workflow, the consumer pays for an item at the cash register by a check, and the cashier scans that using a check scanner and ... gives [it] back to the consumer, [and] saying, are you OK that I've converted this item to an ACH payment, so you're not going to see it on your statement as a check anymore, and I'm going to give you this check back and you can tear it up or do whatever you want with it?"

Springhetti noted that BOC never took off at Wal-Mart because consumers and cashiers alike found it too confusing. And consumers could always opt out of the process, preferring the familiarity and longer settlement time of traditional check processing. However, new BOC rules do not require cashiers to go through this rigmarole.

Now "you don't have to give the check back to the consumer," Springhetti said. "All you have to do is post a sign ... that says we may convert your check to ACH."

Fiserv-owned CheckFree serves 21 of the top 25 U.S. financial institutions and processes more than 1 billion transactions per year. It recently introduced a remote deposit capture product that allows consumers to electronically scan and deposit checks from any location with a PC, a scanner and an Internet connection.

"The consumer capture story is just catching like wildfire," Springhetti said. "If we create a fever in the consumer side of the equation, the merchants that have had this ability to do [BOC] may wake up and say, boy, you know it's now widely accepted. Why is it that I can do this at home, but I can't electronically capture this at the cash register? I still have to go make these deposits at the bank."

If ISOs and merchant level salespeople (MLSs) can help feed the BOC flame, it may lead to profits for them.

The ascendancy of magnetic stripes was a turning point in our industry. "If you really look at the processing industry and how it has grown, it all comes down to a simple, yet very effective technology: magnetic stripe cards," said Lisa Shipley, Senior Vice President of Hypercom Corp.

"Without the introduction of these cards, the industry would have had great difficulty in spawning the processing industry we know today."

Magnetic stripe use on cards was introduced when the London Transit Authority installed a magnetic stripe system in the London Underground in the early 1960s. The idea didn't migrate to bankcards until the 1970s. And it wasn't until the magnetic stripe took off that the use, and acceptance, of credit cards really took hold.

Monthly pencil-and-paper tabs kept by merchants at the cash register used to be routine. People ran tabs at local mom-and-pop grocery stores, feed stores, drug stores or bars. That system worked when the majority of the population lived in small towns. But as cities grew and populations became more mobile, that kind of personal credit became less efficient.

For credit cards to become the payment force they are today, the credit card had to become mobile, too. It had to expand to customers the merchants didn't know by name. Magnetic stripe cards helped make that process efficient.

Electronic processing

"The largest innovation, of course, is the movement to electronic processing," said Douglas Mack, President of Card Payment Systems.

"Could you imagine what it would be like without it? It would be like ... writing a check. Oh yeah, some people still do that, which makes you wonder; what took the check industry so long to catch up?"

Jared Isaacman, Chief Executive Officer of United Bank Card, agreed the most significant development in the payment processing industry was the migration from paper-based processing to electronic draft capture.

"This was the single biggest technological leap in our industry's history," he said. "This took merchants from a very manual process of hand writing sales drafts, using a manual imprinter and submitting them to their bank for delayed funding all the way to real-time authorizations, automated settlement and receipt of funds in 48 hours.

"This technology paved the way for credit card equipment boom, which launched the entire ISO/MLS market in this country, as well as led to future technological developments like wireless terminals, POS systems, contactless payments, etc. The development of electronic draft capture terminals was the foundation for the entire payments industry as we know it today."

Computers

In terms of life-changing innovations, the computer ranks up there with antibiotics and the automobile.

Jeffrey Shavitz, Executive Vice President of Change Card Systems, said, "The single-most technologically influential item for our industry is the same item that has impacted our everyday lives over the past three decades - of course, the computer!

Shavitz predicted the use of computers for payment acceptance will continue to increase and hurt the sales of classic terminals. "The advent of swipe capability and now PIN-based transactions through the use of desktop and now laptop [computers], both equipped with air cards, provides the merchant with the full functionality of a store/business on the go," Shavitz said.

"Business owners are no longer encumbered with having to carry around numerous pieces of equipment to accomplish the job of our Internet accessible laptop to access a payment portal for bill payments," he noted.

"MLSs and ISOs understand that they need to be computer literate whether working with sole proprietors or public companies on their merchant programs."

Contactless readers and cell phones

Cell phone deployment demonstrates that new technology does not always follow a clear or predictable trajectory. The United States' reliable network of landlines should have given it an edge in the telecommunications sphere.

But third world countries that had scant or unreliable landline networks when cell phones emerged have been able to leapfrog the United States in some cell phone related innovations. Many simply abandoned incomplete landline infrastructures, which forced the widespread adoption of cell phones and related technologies.

Cell phones have dramatically altered our lifestyles, and continue to do so. Watch manufacturers lament that young consumers no longer wear watches; they check the time on their cell phones instead.

The latest generation of cell phones also can be used to take photos, surf the Internet, watch television shows or movies, and play music or games. Like car keys, cell phones are considered indispensable by many when they leave the house.

So it's no surprise that many people in the payments industry think the next tectonic evolution in the processing industry will be radio frequency identification (RFID) cell phone payments.

"I believe being able to use your cell phone to make payments using RFID will be the next hottest thing," said Dee Kawarada, President and Chief Executive Officer of Impact PaySystem. And he's not alone.

Mack said, "I really see payment via cell phone being the wave of the future," he said. "Not so much RFID cards - but phones, yes."

"The technologies currently in development that we believe will have the most impact on our industry are signature capture devices that will enable merchants to store credit card receipts remotely and auto-present certain types of chargebacks - proof of purchase for example - and technology that allows cell phones and PDAs to be embedded with credit card information so they can be used with contactless readers," Freedman said.

Shipley predicted near field communication (NFC) will have great impact on the payments industry over the next 10 years. "NFC is a short-range high frequency wireless communication technology which enables the exchange of data between devices over a small distance between 3 to 4 inches - a cell phone and payment terminal, for example," he said.

"An NFC device can communicate with both existing ISO 14443 smart cards and readers, as well as with other NFC devices, and is thereby compatible with existing contactless infrastructure already in use for public transportation and payment," he noted.

In Japan and other Asian countries, millions of consumers are accustomed to cell phone payments.

Since North American consumers have embraced their cell phones and their credit cards separately, cell phone payment systems appear to be only a step away.

With products that earn rave reviews in trials and then fall flat on rollout and are viewed with skepticism by merchants, the rate of technological innovation in our industry can seem sluggish.

But American consumers (and merchants) approach financial technologies like picky eaters: Some products must be introduced repeatedly before they're sampled; others, for no discernable reason, are universally snapped up the first time they're offered.

So it goes. The history of payments technology is full of bumps, starts and turns, with some skyrocketing hits continuing to transform the landscape.

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